Question

ACCT505 – Project 1 Instructions You have just been contracted as a budget consultant by LBJ Company, a distributor of bracelets to various retail outlets across the country. The company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. You have decided to prepare a cash budget for the upcoming fourth quarter in order to show management the benefits that can be gained from proper cash planning. You have worked with accounting and other areas to gather the information assembled below. The company sells many styles of bracelets, but all are sold for the same $10 price. Actual sales of bracelets for the last three months and budgeted sales for the next six months follow (shown in number of units): July (actual) 20,000 August (actual) 26,000 September (actual) 40,000 October (budget) 70,000 November (budget) 110,000 December (budget) 60,000 January (budget) 30,000 February (budget) 28,000 March (budget) 25,000 The concentration of sales in the fourth quarter is due to the Christmas holiday. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month. Suppliers are paid $4 for each bracelet. Fifty-percent of a month's purchases is paid for in the month of purchase; the other 50% is paid for in the following month. All sales are on credit with no discounts. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below. Variable expenses: Sales commissions 4% of sales Fixed expenses: Advertising $220,000 Rent $20,000 Salaries $110,000 Utilities $10,000 The company plans to purchase $22,000 in new equipment during October and $50,000 in new equipment during November; both purchases will be for cash. The company declares dividends of $20,000 each quarter, payable in the first month of the following quarter. Other relevant data is given below: Cash balance as of September 30 $74,000 Merchandise purchases for September $200,000 The company maintains a minimum cash balance of at least $50,000 at the end of each month. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded.

Answer 1

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Sales Budget	July	August	September	October	November	December	Total Q4	January	Formula
Sales units	20,000.00	26,000.00	40,000.00	70,000.00	110,000.00	60,000.00	240,000.00	30,000.00	A
Selling Price	10.00	10.00	10.00	10.00	10.00	10.00		10.00	B
Budgeted Sales Revenue	200,000.00	260,000.00	400,000.00	700,000.00	1,100,000.00	600,000.00	2,400,000.00	300,000.00	C=A*B
Sale Commissions at 4%				28,000.00	44,000.00	24,000.00	96,000.00		P= C*4%
Collection Budget	July	August	September	October	November	December	Total
20% collected in the month of sales				140,000.00	220,000.00	120,000.00	480,000.00		D=C*20%
70% collected in the next month of sales				280,000.00	490,000.00	770,000.00	1,540,000.00		E=C*70% of previous month.
10% collected in the second month of sales				26,000.00	40,000.00	70,000.00	136,000.00		F=C*10% of previous to previous month.
Total Scheduled Collections				446,000.00	750,000.00	960,000.00	2,156,000.00		G=D+E+F
Merchandise Purchase Budget				October	November	December	Total	January
Sales				70,000.00	110,000.00	60,000.00	240,000.00	30,000.00	A
Closing Stock @ 40%				44,000.00	24,000.00	12,000.00			H= 40% of A of next month
Opening Stock				28,000.00	44,000.00	24,000.00			I= A*40%. Because 40% of closing stock is maintained. So opening stock will be 40% of current month sales units.
Budgeted Purchase				86,000.00	90,000.00	48,000.00	224,000.00		J=A+H-I
Cost per unit				4.00	4.00	4.00			K
Material to be purchased (Value)				344,000.00	360,000.00	192,000.00	896,000.00		L=J*K
Merchandise Payment Budget			September	October	November	December	Total
Material to be purchased (Value)			200,000.00	344,000.00	360,000.00	192,000.00	896,000.00		L
50% Paid in same month				172,000.00	180,000.00	96,000.00	448,000.00		M= L*50%
50% Paid in next month				100,000.00	172,000.00	180,000.00	452,000.00		N=L*50% of previous month.
Total Scheduled payments				272,000.00	352,000.00	276,000.00	900,000.00		O=M+N
Cash budget				October	November	December	Total
Beginning Cash Balance				74,000.00	50,000.00	50,000.00
Plus: Collections				446,000.00	750,000.00	960,000.00	2,156,000.00		See G
Cash Available				520,000.00	800,000.00	1,010,000.00			Q
Disbursements
Merchandise Payment				272,000.00	352,000.00	276,000.00	900,000.00		See M
Sale Commissions				28,000.00	44,000.00	24,000.00	96,000.00		See P
Advertising				220,000.00	220,000.00	220,000.00	660,000.00
Rent				20,000.00	20,000.00	20,000.00	60,000.00
Salaries				110,000.00	110,000.00	110,000.00	330,000.00
Utilities				10,000.00	10,000.00	10,000.00	30,000.00
Dividend for last quarter				20,000.00	-	-	20,000.00
Purchase of Equipment				22,000.00	50,000.00	-	72,000.00
Interest paid on Short Term loan				-	-	5,200.00			See Y
Total cash payments				702,000.00	806,000.00	665,200.00	2,173,200.00		R
Excess cash available over cash payments				(182,000.00)	(6,000.00)	344,800.00			S=Q-R
Receipt Short Term Loan				232,000.00	56,000.00	-	288,000.00		See T
Repayment Short Term Loan				-	-	288,000.00	288,000.00		See U
Ending cash balance				50,000.00	50,000.00	56,800.00			V=S+T-U
Loan Balance
Opening Balance				-	232,000.00	288,000.00			W
Receipt Short Term Loan				232,000.00	56,000.00	-			T. This is cash deficit plus minimum balance of $ 50,00.
Repayment Short Term Loan				-	-	288,000.00			U
Closing Balance				232,000.00	288,000.00	-			X=W+T-U
Interest due on loan					2,320.00	2,880.00	5,200.00		Y=W* 1%
Since November month has negative cash balance so I have assumed that interest is paid along with loan amount in December.